Key issues when acquiring an energy and mining company - Part 3

Acquiring a business can be a complex, resource intensive and time consuming process, yet attaining the right business can generate substantial value. We have highlighted some key issues that should be taken into account when acquiring an energy and mining company. In the final of our three part series, we consider points 11 to 15:

Professional advisors

As an acquirer you want to gain comfort that you are acquiring what you expect. High quality financial, technical, commercial and legal due diligence will uncover key issues that could make or break the sale and be key to negotiating a lower price. It is also important to engage a qualified and reputable firm of geological experts to carry out a technical evaluation of the target’s assets in the form of a Competent Persons Report.  If the acquirer is in the UK, they will most likely require a JORC compliant report completed by an internationally recognised firm. However, in other parts of the world, including China or Indonesia, for example, a technical evaluation report produced by a locally recognised firm might be acceptable. It is important your advisers are highly responsive, and can react quickly to changing situations.

Tax status of energy and mining owning company

The tax status of the target will need to be ascertained, including where the assets owning company will be resident for tax purposes? Is it also liable to tax in the country where the asset is located? What rates of tax apply and what reliefs are available for capital expenditure in the relevant jurisdictions? What is the withholding tax position if the company pays interest and/or dividends? Might the tax status of the target company change once it is acquired, for example if there is a change in the location of management and control, and if so what are the implications?

Tax status of the group after acquisition

If there is a holding company which owns the target asset owning company, where is it located for tax purposes? Will this change? How are dividends and other amounts received from the owning company taxed? What are the taxation implications if the business is being acquired by a new holding company, and where should the new holding company be located?

Withholding tax on interest

When arranging finance to acquire the business, it is important to consider whether the payment of interest will give rise to any withholding tax liabilities. For example, if a UK resident company pays interest other than to a UK bank or UK branch of an overseas bank, a withholding tax liability will arise equal to 20% of the interest payments made unless there is relief under a suitable double tax treaty, or an exemption applies for example the financing is a eurobond. Whether or not treaty relief is available will depend on the beneficial owner of the interest receivable. If treaty relief is available advance clearance should be obtained before any payments are made. Many other jurisdictions have withholding tax obligations in respect of interest payments.

Exemption from UK tax for foreign branches

If the energy and mining business is a UK resident company with an overseas permanent establishment or branch in the country where the assert is located, it may be possible to make an election to exempt the profits of the branch from UK tax.  The exemption will apply to profits regarded as attributable to the branch, although profits derived from investment business are excluded. The exemption does not apply to profits which are regarded as having been 'diverted' from the UK.

If you think the issues highlighted here, or in Part 1 or Part 2, are likely to impact your acquisition or would like any further information, please get in contact to discuss how we can help.

Contacts

Mining
Energy

Related links

Energy, mining & renewables


Key issues when acquiring an energy and mining company – Part 2

Acquiring a business can be a complex, resource intensive and time consuming process, yet attaining the right business can generate substantial value. We have highlighted some key issues that should be taken into account when acquiring an energy and mining company. In part two of our three part series, we consider points 6 to 10:

Local knowledge
Are you aware of who owns or operates neighbouring assets  as this may provide an indication of the quality (or valuation) of the asset? Local knowledge and insight into a local market can be crucial as part of an acquisition, including if you are aware of any ownership restrictions in the target company’s jurisdiction and extent of any government intervention. Certain jurisdictions have specific ownership restrictions imposed by local governments depending on the type of assets. Likewise, there might be incentives coming into forces which might benefit the acquirer in the future.

Timing
The timing of any potential acquisition is fundamental to its success. If the assets are part of a distressed sale the acquirer may need to act quickly to avoid the mine, exploration or mining rights being sold to an different acquirer. In another example, an acquirer may be interested in purchasing a particular resource or interest for wider strategic purposes the acquirer will have to act quickly to ensure a successful bid. Having flexible management capacity and quick access to funding is essential to improve the likelihood of a successful acquisition being completed.

Management and key personnel
You need to be clear how hands-on you want to be post the acquisition, and therefore the key personal you wish to retain or transfer across from the seller. It may be necessary to negotiate the retention of key management and personnel with the seller as part of the acquisition and put in place suitable remuneration packages to retain key personnel.

Business planning
What is your plan post acquisition and what if the remaining life of the target’s operations prior to the need to consider rehabilitation and decommissioning? Have you identified areas for revenue growth/cost savings? Do you know how much has to be spent on asset improvements in the short and medium term and have you evaluated the full extent of final decommissioning? By doing this, you are demonstrating your strategy to increase the return on your investment going forward.

Risk management systems
Are there adequate risk management processes and systems in place to identify and manage risks post acquisition that could present threats to future success? A system should be implemented to help to identify and address these risks, as well as increasing the likelihood of achieving the overall business objectives.

If you think the issues highlighted here, or in part 1, are likely to impact your acquisition or would like any further information, please get in contact to discuss how we can help.

Look out for part 3 where we will be highlighting issues including professional advisors, the tax status of energy and mining owning company, tax status of group after acquisition, withholding tax on interest and exemption from UK tax for foreign branches.

Contacts

Mining
Energy

Related links

Energy, mining & renewables


Key issues when acquiring an energy and mining company

Acquiring a business can be a complex, resource intensive and time consuming process, yet attaining the right business can generate substantial value. We have highlighted some key issues that should be taken into account when acquiring an energy and mining company. In part one of our three part series, we consider the first five:

The price

One, if not the most important factor when acquiring an energy and mining company or interest is the price you pay.  Many finance professionals will tell you “valuation is more of an art than a science”, however using bespoke valuation methodologies (discounted cash flow analysis, EV/ EBITDA historical transaction multiples and competent person valuations) will ensure a robust position when negotiating a final price.

Knowing the identity of the current owner

It may affect the acquirer's bargaining power, and hence purchase price. If buying a listed company, room for negotiation might be limited. If buying from a strategic investor who has held it, for argument sake, for a long time or from an owner in financial difficulty, then there might a wider margin for negotiation.

Funding your bid

Are you going to fund the purchase through the acquirer’s existing cash resources? Do you need external financing or debt or are you planning to raise funds through a public offering, and raise funds through a listed vehicle? Do you know how much your lender is willing to lend to fund the acquisition, and whether it will be feasible to secure funding based on future guaranteed production by way of an off take arrangement? Do you know the likely timescale and resources required to complete a public offering? These questions need to answered at an early stage of an acquisition.

Strategic acquisition

What are the reasons for acquiring? To secure source of supply – which was quite popular for Chinese state owned enterprises a couple of years ago. Recently, demand has dropped due to slower economic growth. It depends on the type of assets, together with key demand and supply drivers. However, quality gold and oil and gas assets continue to be well sought after.

Robust and reliable financial systems

Once you have acquired the target company or asset you will need accurate, timely, reliable and robust management information to place you in the optimal position to manage your acquisition successfully. This will include accurate and timely treasury, work capital and foreign exchange management.

If you feel that the issues highlighted are likely to impact your acquisition or would like any further information, please get in contact to discuss how we can help.

Look out for part two where we will be highlighting issues including local knowledge, the timing, management and key personnel, business planning and risk management systems.

Contacts

Mining
Energy

Related links

Energy, mining & renewables